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Peer-to-peer lending: a replacement for banks?

Peer-to-peer lending could offer both lenders and borrowers better rates, but it's not without risks, writes Lorna Bourke.

Peer-to-peer lending: a replacement for banks?

Peer-to-peer lending currently accounts for a tiny fraction of the total loanbook, but this could begin to change as the number of available platforms multiplies.

Demand for alternatives to bank lending

With banks charging an average of 18% for borrowing through overdrafts or credit cards, it's no surprise that consumers are looking around for cheaper sources of finance. At the same time savers are earning a pathetic return, and in some cases are prepared to take more risk to improve income. Could peer-to-peer (P2P) lending be a mutually beneficial solution?

Possibly, but it has to be approached with caution as P2P lending is not regulated and there's no guarantee you'll get your money back. From the borrower’s point of view P2P could be a good source of finance for small projects or to carry a person over a difficult patch. But the interest rates may not be much lower than you would find at a commercial bank. The advantage is that personal lenders may consider a loan of only a few hundred pounds where a bank would not be interested.


P2P lending originated in the US, where it is an estimated to be worth $1 billion, with loan volume in 2012 expected to triple as banks continue to tighten their policies. Zopa is the highest profile P2P lender in the UK and has been around since 2005.  

To reduce the risk to lenders Zopa checks potential borrowers’ credit files and puts them into risk categories. Lenders decide how much they want to lend, at what rate and to which category of risk.  

To keep risks manageable Zopa will only lend small amounts to individual borrowers – so this isn’t really a replacement for a bank loan. A lender offering £500 or more would have their money spread across at least 50 borrowers, who enter into legally binding contracts with their lenders. If repayments are missed, a collections agency uses the same recovery process as the high street banks. Zopa’s cut is a £130 transaction fee and a 1% annual servicing fee to lenders. 

However, Zopa is unregulated and lenders have no comeback if a borrower defaults, other than taking the borrower to court. This is not likely to be practicable since if borrowers were financially sound they probably wouldn’t be borrowing in this way in the first place. Zopa says the average return on loans over the past 12 months has been 6.5% net of charges, but not bad debts.

Other portals is an online portal where investors can make loans directly to small businesses in sums as small as £20 to spread the risk. The average return is around 8.4%, according to the firm. The problem is getting your money back, as these loans may not have a fixed term. Loans can, however, be sold to other investors to realise your cash. 

Another website that puts wealthier investors and small businesses in touch is Lenders set their interest rates and make their investment decisions. Borrowers can get loans between £50,000 and £1 million at fixed rates of 7-15% for six months to five years. All ThinCats loans are backed by debentures or personal guarantees to a similar standard that a bank require. The minimum investment is £1,000.  

Developments in the US

P2P websites in the US such as admit that the majority of their potential borrowers would not pass conventional credit checks. ‘More than 85% of users applying for peer-to-peer loans are not credit worthy,’ says Marco Garibaldi, chief executive of   

P2P lending is growing fast with many different models., for example, lends mostly to those who are a good credit risk and would qualify for a bank loan anyway. brings together creditworthy borrowers with individual and institutional investors. Its results for September 2011 showed a 367% year-on-year increase in loans. 

Much of this growth is driven by the banks’ clampdown on riskier lending, and some is idealistically motivated. Prosper makes no secret of its support for the Occupy Wall Street demonstration, which seeks to break the hold of banks over the US administration.  

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13 comments so far. Why not have your say?

Martin Campbell

Nov 14, 2011 at 09:32

Hi Lorna - declaring an interest - I am a consultant who has worked with Zopa for last 4+ years. I've got a couple of factual corrections - sorry!

The first online peer to peer lender anywhere in the world was in fact Zopa, started here in little old London in March 2005. I think it is important that UK gets the credit it deserves, as the perception is normally that it's US inventions transforming the world - this time its British!

Secondly, Zopa loans are NOT restricted to small amounts. A borrower can borrow up to £15,000. It is true that Zopa loans at smaller amounts are even more competitive than Banks as Banks have little or no interest in lending less than £5k.

It is true that Lenders' money is spread widely across borrowers to help diversify risk - as you said - any sum they lend over £500 is automatically spread across 50 or more borrowers. Many Zopa lenders have now lent huge amounts with hundreds now lending more than £25k and a smaller number lending hundreds of thousands.

You also did not mention the all important loan default rate, which is still less than 1% and is the lowest risk personal loan book in the UK. Zopa loans now represent somewhere between 1% and 2% of ALL UK personal loans being made month by month now.


Martin Campbell

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Alex Gowar

Nov 14, 2011 at 10:45

Interesting viewpoints Laura - hope you don't mind if I make two points

(For full disclosure - I'm part of the RateSetter management team.)

Your point about regulation is correct in as much as there is no defined regulatory body for the lending side of peer to peer (all consumer credit for Borrowers is licensed by the Office of Fair Trading). As the sector grows, more regulation is needed and a clearer framework must be established. For this reason, RateSetter, Funding Circle and Zopa have created a self-regulatory body, the P2P Finance Association (, establishing in the process an agreed set of principles for peer to peer lending. Things like minimum capital requirements, living wills and ring-fenced client accounts are all designed to give protection to the consumer and protect from rogue operators.

My second point would be that the last year or so has seen the emergence of new and fresh visions of p2p lending which are expanding and reinvigorating the sector. RateSetter (for example!) has introduced a Provision Fund which shields lenders from bad debt, which has allowed us to ensure that we have returned every penny of capital and interest to every lender. Funding Circle has introduced SME lending, Market Invoice are allowing SMEs to secure borrowing against future invoices, and CrowdCube are creating a p2p environment for seed investing.

It of course remains to be seen whether these businesses can offer true competition to as vested a set of interests as the banking industry, but with over £100m borrowed and lent within the sector in the last 12 months, it seems the future is bright.


Alex Gowar

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Ian Gurney

Nov 14, 2011 at 12:00

I'm also declaring an interest as I'm the founder of P2P Money, a website providing information on peer-to-peer lending. To further Martin's above point, there are now £100million of loans currently in the UK originating from peer-lending sites, of which around 75% originated from Zopa.

Zopa, along with RateSetter are the major players in the peer-to-peer market. Funding Circle and ThinCats operate in the peer-to-business market. Loans from FundingCircle are fixed term, either 12 or 36 months, but they can be sold on to other lenders on a secondary market.

There is an important distinction with P2P lending in the UK and the US. The majority of UK providers are targeting the top end (low risk) of borrowers and have therefore managed to achieve competitively low bad debts.

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Graham Pateman

Nov 14, 2011 at 13:29

Please take care and understand the risks especially if lending through any new sites that come along.

Having lent to a number of people on Quakle a large percentage of the borrowers have defaulted and Quakle had little or no protection to offer lenders like me. I understand that this type of lending comes with risks but that site needs to be used as an example of just how bad losses can be.

Quakle is now effectively closed with little or no hope of lenders getting much more money back than they've already had, which isn't much.

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Michael Peters Fenwicks

Nov 14, 2011 at 13:42 is the best but once again know your client even if the website gives you protection.

Once Again Be sensible and practical while also respecting processes - You are all educated enough to know!!!!

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Robert Court

Nov 14, 2011 at 14:59

Lorna or Martin Campbell

' Zopa’s cut is a £130 transaction fee and a 1% annual servicing fee to lenders. '


On a £500 loan? Surely not a huge 26% fee?

Please explain the charges to both lender and borrower!

MPF seems 'interesting' - have you used them?

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Michael Peters Fenwicks

Nov 14, 2011 at 17:13


I would recommend them best but again please know your client as the only alternative to common sense should you be the sponsor!

On I would say that you get a sophisticated lender unlike other sites while also competition is the key to the overall process between parties.

Terms are always very well clarified while also the sponsor delivers a well structured information pack which at best is very flexible with no penalties for earlier repayment.

Friends of mine have used used to unlock all types of investments as alternative to other vehicles available in the market.

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Robert Court

Nov 14, 2011 at 17:53

Sir Fenwicks M.P.!

Thanks for the information; if I took advantage would I then be a 'sophisticated lender' as opposed to an 'uncultured slob investor'?

Do 'sophisticated lenders' ever become 'fat cats' I wonder..........?

I take heed of the warning 'know thy client' and assume that individual lenders and borrowers are 'married up' and there lies the warning to do one's homework and not step into that which fallen angels have already trod.

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Lorna Bourke

Nov 14, 2011 at 18:47

David de Konig of Funding Circle points out that in fact all Funding Circle loans are fixed term, for either one or three years, with lenders receiving a set monthly sum (repayment of the loan, plus interest) from the borrower.

‘You’re right that if a lender wants to access all of their investment in one go they can also sell their loans on a secondary market. Some 99% of loans using this method are sold in two days. This means there’s no waiting around for borrowers to get hold of their money, and it also offers a nice alternative to the Savings Bond market which is non-transferable.'

To date, lenders have offered over £40 million in funds to small businesses through

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Daye Tucker

Nov 14, 2011 at 22:11

Interesting market responses are surfacing in response to unsustainable traditional bank lending, or rather the lack of it. Just shows, like people, bank lending can be expendable. Investment products are now being created to provide loans to farmers offering an alternative.

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Anonymous 1 needed this 'off the record'

Nov 15, 2011 at 15:09

My first experience with P2P lending (fortunately on a relatively small scale) has not been a good one. I have had quite a few bad debts/losses much reducing my return - people need to be aware that you don't just lose interest (and future anticipated interest) but the full loan amount..

The site in question used to be a bit cagey about the impact of bad debts and tends to exclude them when quoting returns.

When I started, the rates of return were quite attractive. Although the bank loan rates are high, competition in the market seems to have driven the P2P returns down to a level (when the bad debt is accounted for) not much better than 5 year fixed tern bank account. The P2P loan terms on offer are for 3 or 6 years.

To try and ensure that I was fully invested, I kept trimming my rates to compete. However, for sometime, more than half of my money has remained uninvested in my lending offer with themonthly repayment interest from the loans gradually increasing my amount not lent out/available to borrowers. Consequently, it is not invested and therefore not gaining interest. My returns are going to be much less, simply because I find it difficult to get fully invested at a reasonable return when their bad debt estimate and the 1% lending fee is taken into consideration.

Sadly my conclusion is that although it is an interesting and novel proposition at first, the novelty wears off and you would be better off with the security, "no risk" government protection guarantees and assured rate of return that fixed term bank accounts offer. The other advantage is that you can just leave the money in a bank, there is no continuous management required to try and keep you money fully invested at the optimum rates.

In my opinion, the scheme largely favours the borrower and the lack of protection afforded the lender, renders it unsatisfactory. There is also the tax liability and lenders will need to declare it on their tax form as you are required to do with banks.

I will, however, look with interest at some of the other P2P provider offerings mentioned.

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Vague Shot

Dec 04, 2011 at 09:54

I've been a Zopa investor for about four years now, after I started by investing the proceeds of my late wife's Porsche. I've had about 2300 contracts, and of those nine have gone belly up costing me about £400. Compared to what I have invested, it is a very small percentage. Tips for successful investing.

1. Spread your risk on their various markets.

2. Try to keep your rates high, but don't be greedy.

3. Restrict the amount you lend to any individual to £50 or £100.

4. Look at your investments every day and keep a spreadsheet of your performance. I have made a couple of changes to philosophy, when I've seen the way things are going.

My return before tax since I started is upwards of six percent, including charges and bad debt. And it's getting better, as Zopa seem to be cutting out the dodgy lenders. I also think that borrowers are getting more sophisticated and Zopa's terms and conditions are attracting the good and savvy borrowers. For instance, I've met a couple of Zopa borrowers, with good credit ratings, who needed to tide themselves over a cash-flow problem. They did this by borrowing say £7,000 and then cashing in the loan, when they got paid for a job. Zopa doesn't charge borrowers for early settlement, so it's a good place to borrow if you have a good credit rating and need a loan for a shiort time.

It certainly has been a much better investment than putting my money on deposit at Nationwide.

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Sep 27, 2013 at 13:38

comment of interest 27/09/13

08/16/2013 07:08 AM

I am with Funding circle and Zopa. I put £5000 in each to test the waters. It seemed such a good idea at the time and the default rates were so low. However two defaults with Funding Circle mean I am currently £200 short after 9 months with no prospect of recovering this.

So far Zopa has faired better, but to get good returns you must leave your money in there so that the interest you earn is ploughed back into loans. Also Zopa are so aggressive in getting you to plough more in

Do not forget that these are money-making for-profit businesses and not holier than though self-help groups.

I have decided that they are not for me and I would urge new investors to only put in amounts that they can afford to forget for a while. Some people do well; most break even and some lose.

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